If it looks too good to be true . . .

Submitted by admin on Wed, 02/02/2011 - 09:08

Hoard's Dairyman:

If it looks too good to be true . . .

Date:

Wed, 02/02/2011

The recent runup in 2011 Class III milk price futures at the Chicago Mercantile Exchange has brought both relief and a euphoria to the nation’s milk producers. But, as we’ve said before, as prices have climbed we’ve become increasingly wary. Here are more reasons why:

You probably already know that Class III prices go up or down each weekday as a result of trading at the CME. But did you know that trading is done by only a handful (often less than 10) people? Did you know they gather around a whiteboard to make offers to buy or sell products or to just observe? Did you know each day’s trading session never lasts more than 10 minutes and is usually much less? Did you know prices for butter, powder, and cheese can go up or down (and often do) merely by offering to pay more or sell for less than the previous day’s price, even if no sales actually take place?

Last week, block and barrel cheese prices at the CME increased from $1.525 and $1.51 per pound, respectively, to $1.735 and $1.705. Prices for both products increased every day. What you may not know is that almost no sales took place. During the entire week, only one load (40,000 to 44,000 pounds) of blocks was sold and only three loads of barrels.

Think about that: A huge movement in a huge component of the process that determines monthly milk prices for every dairy in the U.S., which translates into over $2 billion in aggregate monthly milk income, was driven by four sales involving a grand total of less than $300,000. How wise is it to take year-long business risks based upon prices that involve so little actual market activity, and a process that is so unpredictable.